Good day, and thank you for standing by. Welcome to the BAWAG Group Q3 2023 results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during the session, you will need to press star one and one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one and one again. Please be advised that today's conference is being recorded, and a transcript will be provided on our website. I would now like to hand the conference over to your speaker today, Anas Abuzaakouk, CEO. Please go ahead.
Thank you, operator. Good morning, everyone. I hope everyone is keeping well. I'm joined this morning by Enver, our CFO. Let's start with a summary of the Q3 results on slide 3. We delivered another strong set of quarterly results, with Q3 net profit of EUR 186 million, earnings per share of EUR 2.25, and a return on tangible common equity of 27.6%. The operating performance of our business was very strong, with pre-provision profits of EUR 268 million and a cost income ratio of 31.3%. Total risk costs were EUR 22 million, translating into a risk cost ratio of 21 basis points.
We utilized our management overlay for the first time, with our ECL management overlay now at EUR 80 million, more than sufficient to address idiosyncratic risks in the portfolio and still equal to almost a full year of risk costs. Credit performance remains solid across all businesses, with a low NPL ratio of 1%. In terms of balance sheet and capital, average customer loans were down 3%, and average customer deposits were up 1% quarter-over-quarter. Average customer funding, which is made up of customer deposits and triple A-rated mortgage and public sector covered bonds, was up 1% quarter-over-quarter.
We generated over 90 basis points of gross capital from earnings and landed at a CET1 ratio of 14.2%, net of EUR 453 million of capital distributions in the form of the year-to-date dividend accrual of EUR 278 million and the EUR 175 million share buyback program, which was approved on October fourth and is currently being executed. We have a fortress balance sheet with excess capital of EUR 386 million. Ample liquidity with cash and cash equivalents of approximately EUR 11 billion is equal to 21% of our balance sheet, an LCR of 218% and one of the lowest NPL ratios across European banks of 1%, reflecting the strong asset quality. This will allow us to ultimately play offense as we stay patient and liquid in the current market environment.
With our strong operating performance during the first three quarters of the year, we are on track to deliver a record year of earnings for the franchise and expect to meet or exceed all 2023 targets, despite an overall subdued market and cautious consumer sentiment. We have a resilient franchise across all cycles, with very strong earnings, strong capital generation, conservative and disciplined underwriting, and a diversified and robust funding stack with granular retail deposits and long-dated covered bonds that is the foundation of our funding. This will allow us to consistently deliver quality results. We continue to remain vigilant in managing risks, requiring us to be patient, always focused on risk-adjusted returns, and not be distracted by irrational lending or short-termism. We focus on the things that we can control: our investments, our risk appetite, the daily operations of the bank, and being good stewards of capital.
We target completing the EUR 175 million share buyback program by the end of the year, and we'll address further capital distributions with our year-end results based on current M&A prospects, market developments, and subject to regulatory approvals. Moving to slide 4. We delivered net profit of EUR 186 million, up 40% versus prior year. Overall strong operating performance with operating income of EUR 390 million and a total expense of EUR 122 million, up 16% and 2%, respectively, versus prior year. Total pre-provision profits were EUR 268 million, up 23% versus prior year. Underlying risk costs were EUR 22 million, down 38% versus prior year.
Tangible book value per share was EUR 33.23, up 6% versus prior year and 3% versus prior quarter, net of the year-to-date dividend accrual and share buyback program. Moving to slide 5. At the end of the Q3 , our CET1 ratio was 14.2% after deducting EUR 453 million of capital distributions in the form of the year-to-date dividend accrual and the share buyback program. For the quarter, we generated approximately 90 basis points of gross capital from earnings. As of Q3 , we have EUR 386 million of excess capital above our stated CET1 target of 12.25%. We have more than sufficient dry powder for organic and inorganic opportunities and will address further capital distributions with our year-end results, as we'll have a firmer view on the M&A opportunities at that point.
The acquisition of Peak Bancorp in the United States is still pending regulatory approval. Overall, we are well positioned to address multiple market opportunities given our strong earnings, capital, and liquidity. On slide 6, our retail and SME business delivered net profit of EUR 137 million, up 24% versus the prior year, and generating a very strong return on tangible common equity of 39% and a cost income ratio of 29%. Average customer assets were EUR 21.9 billion, and average customer deposits were EUR 26.3 billion, both down 1% quarter-over-quarter. Average retail customer funding was EUR 37.2 billion, which is a combination of customer deposits and AAA-rated Austrian mortgage-covered bonds, was flat versus prior quarter.
Pre-provision profits were EUR 206 million, up 20% compared to the prior year, with operating income up 13% and operating expenses down 1%. Risk costs were EUR 22 million, reflecting our current run rate of risk costs. The trend in asset quality remains strong across our customer base, with a low NPL ratio of 1.8% and a risk cost ratio of 40 basis points. We expect continued solid performance in the retail and SME business in the Q4 , but muted loan growth, given the current economic environment and overall cautious consumer sentiment. On to slide seven. Our corporate real estate and public sector business delivered net profit of EUR 42 million, up 19% versus the prior year, and generating a strong return on tangible common equity of 23% and a cost income ratio of 26%.
Average assets for the quarter were EUR 13.6 billion, down 5% versus prior quarter. Average customer deposits were EUR 5.8 billion, up 8% versus prior quarter. Average customer funding is a combination of public sector and corporate deposits, as well as AAA-rated Austrian public sector covered bonds, was EUR 7.3 billion, up 4% versus prior quarter. Pre-provision profits were EUR 57 million, down 4% compared to the prior year. Risk costs were effectively zero. However, we utilized EUR 20 million of our management overlay to address an idiosyncratic risk in our US office exposure. The trend in the overall asset quality continues to be solid, with our NPL ratio at 90 basis points for the entire segment.
We pride ourselves on disciplined underwriting, focusing on risk-adjusted returns, which factor in losses across all cycles and avoiding blindly chasing volume growth, specifically during the benign credit cycle we witnessed over the past few years. We will continue to be disciplined, and we'll have the capital and liquidity to support our customers, as well as capital to capitalize on any dislocations. Heading into the Q4 , we have a solid pipeline of opportunities and more broadly see credit repricing across various asset classes. On slide 8, an update on the real estate portfolio. We experienced a 1% reduction quarter over quarter in our real estate loans. The portfolio continues to perform well, reflecting the underlying exposure to residential, logistics, and industrial assets, which make up 65% of the total real estate portfolio and 72% of our U.S. exposure.
Our office exposure in the United States stands at $472 million. We utilized $20 million of our management overlay on the US office exposure during the Q3 , which was the most challenged of our US office exposures and idiosyncratic in nature. The remaining portfolio is performing with a debt yield of approximately 10%, weighted average lease term of approximately 6.5 years, and an LTV below 60%. The performing US office, office portfolio represents less than 1% of total assets, approximately 1% of total customer loans, and 8% of our total real estate assets.
We are confident that we will be able to address any potential issues in the real estate portfolio and believe our recent EBA stress test results with a cumulative loss rate under 2% over a 3-year period, which applied a reduction in collateral values of over 50% given various add-ons, is a good proxy for stress loss assumptions across the portfolio, which is less than the remaining EUR 80 million management overlay. As I've stated before, the stress we are seeing in certain asset classes, commercial real estate being one, will differentiate banks in terms of underwriting and asset quality. With that, I will hand over to Enver.
Thank you, Anas. I will continue on slide 10. Again, very strong quarter with net profit of EUR 186 million and a return on tangible common equity of 27.6%. Core revenues were up 1% versus prior quarter, with net interest income up 1% and stable net commission income. Compared to prior year's Q3 , core revenues were up 17%. Operating expenses up 1% and cost income ratio relatively stable at 31.3% for the quarter. Risk cost of EUR 22 million, in line with prior quarters, with a risk cost ratio of 21 basis points. We utilized our management overlay for the first time, with our ECL management overlay now at EUR 80 million. On slide 11, we show key developments of our balance sheet. Overall, a quite stable trend in the Q3 .
Customer loans were down 1%, and average customer deposits were up 1% quarter-over-quarter. Our position of cash and cash equivalents stands at EUR 11 billion or 21% of the balance sheet, leaving us with a very comfortable liquidity buffer to address potential organic and inorganic market opportunities in the quarters to come. In terms of capital, we again generated approximately 90 basis points of gross capital from earnings and after accounting for the ongoing EUR 175 million share buyback and a EUR 278 million year-to-date dividend accrual, CET1 ratio came in at 14.2%, leaving us with an excess capital of EUR 386 million. On slide 12, our customer funding, which is made up of customer deposits and AAA-rated mortgage and public sector covered bonds, grew by 1% quarter-over-quarter to around EUR 45 billion.
Cash position now at EUR 11 billion. In terms of customer deposits, no relevant structural changes in the Q3 . Repricing continues in line with our expectations, and overall deposit betas are now at around 20%, and expected to grow further to below 40% in the coming quarters. With that, moving on to slide 13, core revenues. Positive net interest income trend continues at a low pace in Q3, up 1% versus Q2, despite lower customer loans.
... Net interest margin now at 297 basis points for the quarter, improved by another 6 basis points despite ongoing deposit repricing. In terms of net commission income, overall good and stable performance in payments and advisory business, with customers shifting more into fixed income products. For 2023, we expect core revenues to grow by more than 14%, and for the Q4 , we expect to see a very similar development compared to Q3, so around 1% growth. Slide 14, operating expenses completely in line with expectations and fully on track to meet our target of 2% year-over-year. For the quarter, operating expenses were up 1%, and our cost income ratio remained largely stable, now at 31.3%.
We have started working on different initiatives to address future inflationary pressures, and we will continue to focus on absolute cost targets also in the coming years. Slide 15, risk costs. Overall stable and underlying trends and strong asset quality with a continued low NPL ratio of 1%. The risk cost rounded stands at EUR 22 million for the quarter, which is in line with the underlying trend of the past couple of quarters, and with the risk cost ratio now at 21 basis points. We utilized our management overlay for the first time to address a single case in our U.S. office exposure, with our ECL management overlay now at EUR 80 million, and we do not expect any further releases in 2023. On slide 16, we wanted to reiterate our 2023 targets.
Our previously updated 2023 targets remain unchanged, and after another strong quarter, we are further on track to a record year of earnings in 2023, meeting or exceeding all targets. With that, operator, let's open up the call for questions. Thank you.
Thank you. To ask a question, you will need to press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. We will now go to your first question. One moment, please. And your first question comes from the line of Gabor Kemeny from Autonomous. Please go ahead. Your line is open.
Hi, team. Thank you for the presentation. I have a couple of questions, firstly on CRE. Can you elaborate a little bit further on how this specific U.S. office exposure has been provisioned, and what triggered the top up here? Also, I think you mentioned that you are not expecting further overlay releases this year. How do you think about changing tweaking your overlay provisions over the next year? Finally, a broader question on CRE: What reassurance can you give to investors that this U.S. office default was not the kind of canary in the coal mine, and was indeed an idiosyncratic case? And yeah, my final question would be on costs?
Obviously, early days, but you have been very proactive with managing your cost base in the past. What is your sense of the cost outlook going into 2024, if inflationary pressure would persist? Thank you.
Thanks, Gabor, very good questions. I will take the commercial real estate, and then, Enver , maybe you want to address the cost?
Yeah, sure.
So Gabor, as we stated during the presentation, this is a unique, idiosyncratic exposure. The very reason of having the management overlay was to address these types of risks. This exposure we had on the watch list, I would tell you this is the worst of our office exposures, not just in the U.S., Europe, across the board, in terms of different asset classes. But I think only time will kind of bring that to fruition, as you see our quarterly developments in the Q4 and then going into 2024. As far as NPL buildup, we're at 1% for the entire franchise. We're at 1.4% in the real estate. I think those are the levels you'll see kind of steady out.
And this is given just kind of a declining asset balance, so, potentially it improves from there. We don't see any further buildup in NPLs. The overlay, which now stands at $80 million, we think we were more than conservative in how we addressed this particular exposure, effectively marked it at an 8.5% cap rate. If you think about U.S. office, kind of going back as far as the data's available, I think the peak didn't even reach 10% cap rate. So we feel good about the overall, remaining exposure, the $400 million or so, that is performing. I'd mentioned in the presentation, the debt yield is around 10%.
If you even used a 10% cap rate on the remaining US office exposure, the overlay of EUR 80 million is sufficient to cover that, and that is a tail risk. You know, never say never, but we feel that we're well positioned. We don't see anything on the horizon. This particular case was idiosyncratic. It was on the watch list, and we would rather address it head-on. We did it in the Q3 as opposed to end of year, and we feel pretty good about the remaining exposures that we have. But I think this is gonna be one where you just have to see our development quarter-over-quarter to understand how we've underwritten these, these loans and the quality of the portfolio. And I think there was a question on cost.
Yeah. Yeah, so Gabor, on the cost side, you're experiencing a bit of higher inflation rate in Austria, versus the rest of Europe. So we started early, addressing that kind of, you know, inflation. It's a bit early to give an outlook for the coming years, but I think we have been very consistent in, in messaging in the last couple of quarters and also years. So my kind of direction that I would give you is, is probably in the context of what you're seeing 2023, in terms of, you know, OpEx increase, is probably around the number that we also would, think about also for the coming years. You know, assuming inflation stays high. If inflation comes down, obviously that would be a better number.
But we're assuming the worst on that, right?
Yeah.
In terms of year-over-year.
Okay, impressive. Thank you.
Thanks, Gabor.
Thank you. We will now go to our next question. Your next question comes from the line of Johannes Thormann from HSBC. Please go ahead.
Good morning, everybody. Johannes Toman, HSBC. I have some questions as well on U.S. commercial real estate. Just on the yield and debt, which is nicely high with 10%, but, but what kind of risk did you take for it? And, and sorry to come back on the default case, can you give us more details on city or type of office building or the tenant structure so we can understand what's different to the normal business and what makes this the worst of your exposures? And probably, in hindsight, hindsight is 20/20, I know, but what has been done wrong in this deal? And then probably just on, on a little bit, you increased your shopping exposure by a minor percentage. What has been driving this?
Last but not least, on your NII outlook for 2024, did we see the peak in 2020 Q3, or do you still expect a moderate uplift? But the increase level was very small compared to the previous quarters. Thank you.
Thanks, Johannes. All very good questions. Let me take the commercial real estate, and then I'll defer to Enver on the NII development. Johannes, as far as the commercial real estate, what I'd mentioned to Gabor is, this is unique. You know, we classify all of the properties that we have as Class A. What happened on this particular property, which was underwritten in 2019, was effectively just the rent roll. The potential sponsor in this, which is, by the way, the only deal that we have with this particular sponsor, made a projection on rent rolls and the ability to lease up the building, but didn't come to fruition. You could say COVID, you could say the market turned. It is what it is. This isn't...
You know, when we underwrote the loan, we felt pretty good about the overall credit metrics in. This is one that unfortunately did not go our way. So what we did was we took a full assessment in terms of what we believe the value is today at an 8.5% cap rate, which I think is quite conservative, if you kind of benchmark that to where other people are valuing assets. And we think this is, you know, the worst is behind us. As far as the remaining U.S. office exposure, I think the 10% debt yield and the 6.5-year weighted average lease term, those are really powerful. And the quality of the tenants and the particular sponsors give us a lot of comfort that I think we're going to be in a good place.
But like everything else, Johannes, you'll have to see it in every quarterly development. I understand that the skepticism in the market, and that's why we feel pretty good, going into the coming quarters and going into 2024, that the worst is behind us. But I think this is gonna be one where just time will tell. And you want to take the-
Yeah. So Johannes, on the NII trends, so it's not peak in terms of NII, so we still expect NII to grow, just at a slower rate as we have seen in Q3. The reason for that is, you know, we are coming probably close to the end of the rate cycle, and that just, you know, trickles through then into the run rate. Deposit betas are going up as expected, pretty much in line, even a bit slower than what we thought. And still, you know, we are nicely offsetting that with the replication income on the other side. The question is gonna be, you know, as I think mentioned on the Q2 call, is development on the asset side. You know, we've seen some stabilization in the Q2 .
how this will, you know, develop over the next couple of quarters, that could drive the NII a bit higher than what we are seeing today. But otherwise, I would say Q3 is a good proxy in terms of kind of growth rate, for the next quarters.
Okay, understood. Thank you. Just coming back on the U.S. shopping exposure, what's triggered your move back into this niche?
Honestly, I think it's just a technical, but let me come back to you. I think just the denominator is a bit slow, lower, and that's why it looks like-
There was no retail shopping loans, Johannes.
No.
I think this is just around the-
Okay, got you. Okay, thank you.
Thanks, man.
Thank you. We will now take the next question. Your next question comes from the line of Tobias Lukesch from Kepler. Please go ahead.
Yes, good morning. 3 questions from my side as well, please. One on the loan book, one on M&A and capital return, and the last one, again, touching quickly on the NII. So, on the loan book, could you elaborate a bit more on the trend in the Q4 and how you expect actually the loan book to develop over the next 12 months? You mentioned the discipline, you mentioned now a solid pipeline and the credit repricing. So, where does that bring us if we compare that, of course, you know, to the last quarter and also to the year-on-year comparison? And that looks, yeah, down 2.5% on retail SME, 12.5% on corporate real estate, and treasury also down 3% year-over-year. So, looks quite negative.
Where's the turnaround? Where do you see the bank going here?
... Hey, Tobias. Let me go ahead and take the first one, and then we can address, I think, the, yes, two other questions. As far as overall customer loans, it's been anemic year to date. I think we've consistently mentioned that if you look at the overall market dynamics, volumes— Let me just focus on the retail front. When you look at mortgages in the different markets that we're in, have collapsed, you know, 50%-60%. So that's one dynamic. And then what remains in the market, just we don't think the risk-adjusted pricing makes a lot of sense. So that contributes a lot to you know, the quarter-over-quarter development of customer loans on the retail front. As far as the corporate real estate public sector, that is more transactional.
In things where I'd say at a standstill for the H1 of the year, and then at least at the latter part of the Q3 , we started to see some development, and we've actually, I think, built up a decent pipeline. We'll see if it comes to fruition in the Q4 and in the H1 of next year; these things have a bit of a lead time. But we think things are now stabilizing, plus we see credit risk repricing. I've mentioned this before, but now we're starting to see some traction on the corporate front, more so than we've seen in the past. So we'll see. You know, we're gonna be disciplined, Tobias.
We have the capital and liquidity to support customers, to be able to provide credit to the real economy, but at the same time, we need to be disciplined. And that's something that we'll be patient on.
Thanks a lot, Anas. If I understand you correctly, so base case would be slightly down, potentially over the next 12 months, in a good scenario, you could be flattish. Is that fair to say?
No, I'd say, Tobias, the fourth—I think you'll see things starting to stabilize in the Q4 . Retail is probably gonna be a little more challenged from a mortgage standpoint, but I think on other parts of the business, corporate real estate, public sector, as well as securities, which is more on the treasury side, we're starting to see opportunities. Spreads are widening, and we'll hopefully be able to allocate capital liquidity. So I think... I don't wanna call it a bottom, but I think you're gonna see positive development, Q4 and then obviously going into 2024. That's part of, I think, your question on the NII. A lot of that is really dependent on kind of where the customer loans are at.
We're trying to be conservative when we say Q4 is gonna look like Q3 , in terms of just where overall interest-bearing assets or customer loans are at. But you really don't have line of sight until you see kind of where your customer loans stabilize at, for 2024. So.
Understood very good. You just mentioned NII, so Enver said Q3 is a good proxy as a run rate, so we had that kind of 1.1% NII growth quarter-on-quarter. So a kind of 1%, is that a fair assumptions over the next coming quarters, so to say?
Yeah, quarterly.
Did I get that right? On a quarterly basis, yeah.
2024 will be greater than 2023 on just a total basis, so.
On total basis, sure. But quarterly wise, if Q3 is a good run rate, that was really the comment on the NII, right? So NII kind of Q3, good proxy going forward?
That is correct, Tobias.
Great. Thanks, Anas. And then secondly, or thirdly, on the M&A and capital return, could you maybe give again a bit of an update on M&A opportunities, i.e., do you already have built up enough excess capital right now with the EUR 386 million for a potential deal that you're seeing? And on the capital return, maybe could you give a bit more details if and when you would announce or even start a new share buyback? Thank you.
So, Tobias, without getting into the specifics of any particular deal, we're looking at a few opportunities. You know, we'd mentioned earlier this year, with our year-end results in February, that we were anticipating a particular deal that got pushed to the H2 . That's in the pipeline of opportunities that we're looking at in the Q4 and a few other opportunities. I think, this time around, come our year-end results, we'll have a lot more clarity in terms of potential M&A opportunities and where we stand, if we're successful. And if we're not, we will have a discussion around capital distributions, and I think this time it will be a lot more clear, just given the overall timelines of the things that we're looking at. We have EUR 386 million of excess capital.
Everything that we're looking at will be self-funded. We have more than enough capital, we have more than enough liquidity to be able to address these potentially unique opportunities. Obviously, can't go into more detail on what those opportunities are, but it's gonna be an interesting Q4 .
Yeah. Maybe, maybe last one. So if this is the timeline, you know, with the year-end results and you apply for a share buyback, then it's potentially not gonna start before June, July. But, on this, approval timeline and, the many months it took basically to get that, share buyback, approved, which is now up and running, and given the great stress test results you had, I mean, could you, could you share, you know, one or two thoughts, you know, like, A, why this took so long, and B, has to be communication or an indication by the regulator that next time that period could be shortened?
Tobias, this was the third buyback that we had approved. I think we're at a total of EUR 900 million. We have a very good and constructive dialogue with the regulator. We're obviously not gonna share any of the details with those discussions. Just take comfort and assurance from the fact that we've consistently executed on buybacks, and we'll have that discussion at year-end results based on how everything else develops, so.
Understood. Thank you.
Thank you.
Thank you. There are currently no further questions. I will now hand the call back to Anas Abuzaakouk for closing remarks.
Thank you, operator. Thanks for joining the call, everybody who joined both, on the conference call as well as on the web. We look forward to talking to you at our year-end results on February first. Take care, and have a great day.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.